The New York Times has an article about the woes at the FHA which has enough omissions of relevant history so as to render it misleading at points.
Mind you, the main message of the story is sound, namely, that the FHA, long a mainstay of lower-income housing, is suffering increasing losses, because it has been pressured to take a bigger role, which these days is code for to “lower lending standards to prop up the housing market”:
Problems at the Federal Housing Administration, which guarantees mortgages with low down payments, are becoming so acute that some experts warn the agency might need a federal bailout….
In testimony before a House subcommittee, the F.H.A. commissioner, David H. Stevens, assured lawmakers that his agency would not need a bailout and that it was managing its risks.
But he acknowledged that some 20 percent of F.H.A. loans insured last year — and as many as 24 percent of those from 2007 — faced serious problems including foreclosure, offering a preview of a forthcoming audit of the agency’s finances….
Since the bottom fell out of the mortgage market, the F.H.A. has assumed a crucial role in the nation’s housing market….The government is giving as many people as it possibly can the chance to buy a house or, if they are in financial difficulty, refinance it. The F.H.A. is insuring about 6,000 loans a day, four times the amount in 2006. Its portfolio is growing so fast that even F.H.A. backers express amazement.
What bothers me about the piece is that it implies that the losses are due to the low down payments:
In the aftermath of the crash, there is wide divergence on how easy, or how hard, it should be to become a homeowner. Skittish lenders are asking for 20 percent down, which few prospective borrowers have to spare. As a result, private lending has dwindled.
The government has stepped into the breach, facilitating loans with down payments as low as 3.5 percent and offering other incentives to stabilize the market. Real estate agents in some hard-hit areas say every single one of their clients is using the F.H.A.
What is wrong with this? The FHA has ALWAYS been in the low down payment business! It has long offered loans requiring only 3% down, long before “subprime” was part of the lexicon. Historically, FHA loans did not show default rates materially worse than prime loans. That experience has been replicated by not for profit lenders in low income neighborhoods.
In fact, when subprime became a big business (the post 2000 incarnation; there were subprime mortgages in the 1990s, but those were mainly for manufactured housing), it first took share from FHA and then expanded the market. And the big difference from how the FHA once did business versus its subprime competitors was…..the FHA screened loans on an individual basis. The process was time consuming and somewhat intrusive. Private lenders were faster, easier, and (lo and behold) less stringent.
My objection is that the article implies that low down payment loans are a bad idea. They aren’t necessarily. Low down payment loans can be a viable business, but lenders need to screen borrowers much more carefully than when they have a much bigger loss cushion.
And using low down payment loans as a way to prop up the housing market IS a bad idea. The fact that the FHA is cranking so many loans through more or less the same administrative platform is strong evidence that its lending standards have gone out the window.